TECHNOLOGY SPECTATOR: Can Apple imagine again?

Apple's dominance may not last for much longer. With its devices testing the limits of their capabilities, and rivals closing in, the tech giant has a tough road ahead.

As the speculation builds up around Apple’s impending launch of the new iPhone and a possible release of a smaller iPad, Apple’s share price has reached new heights and it has become the world’s most valuable company. However, the fact that this is the same price that Microsoft reached in 1999 might serve as a warning for some. Microsoft’s share price crashed along with everything else in 2000 but has languished, unchanged at around $30 for the past 12 years.In fact, go back 22 years before that and IBM was at its pinnacle. In 1967, IBM was valued at $192.3 million and after you adjust for inflation that is approximately $1.3 trillion in today’s terms. IBM was in turn eclipsed by Microsoft before it redefined itself as a successful software and services company.

One could argue that the rise and fall of both Microsoft and IBM speaks as much about their failures as Apple’s success. I use the word failure somewhat ironically here. Microsoft and IBM are both still extremely profitable companies that earn roughly the same as Apple. Despite Microsoft’s failure so far to make inroads into the mobile market, its dominance in the PC and server software market is unchanged and largely unchallenged.

It's not all about the money

And this is really the point. Microsoft didn’t stop being a profitable company. It just failed to retain the public’s imagination. Why this happened is tied up with how we as people use technology to define what is called our social identities.

Social identity is a concept at the heart of how we identify with a particular group. Ultimately, social identity is at the core of how society functions but when it is manifested as which particular digital or product tribe we are part of, it is about product and brand loyalty.

It is not only about loving Apple but also about not liking competitors and members of other groups like people who like Google. It is also about elevating the former CEO of Apple to demi-god status and ultimately, it is about how the value of a company is perceived and through this the price of its shares.

Manifesting one's social identity through a mobile phone is particularly powerful. It is a highly visible statement of who we are. At the moment, it is this identification with Apple that is driving its popularity, allows it to charge such high margins on its products and is proving such a tough act to beat for Microsoft, Google and companies like Samsung.

As our view of a company is distorted through the lens of social identity, so is our concept of the "value” of a company. Economists have long argued about what drives markets and share prices of companies. The belief that this is somehow rational or efficient has given way to a view that there are psychological factors that are also important. We equate the capabilities and possibilities of a company with their popularity and increasingly how our social network perceives the company. We are far more likely to buy shares in a company that our friends and people we respect buy and we are also likely to have an excessive optimism about how those shares are likely to perform.

There is of course some consideration of the business fundamentals of the company. We can calculate price/earnings ratios, relate share price to dividends or use more sophisticated algorithms. Over the long term, these factors are undoubtedly important. In the short term however, we understand the complexity of companies poorly, and simply don’t know what will happen from one quarter to the next.

Not quite smooth sailing for Apple

Ultimately, we actually don’t know how Apple will do in the near future. We do know it is going to be harder for them to continue at the same pace as they have over the past few years. It is not only Samsung that is providing an ever-increasing challenge to the overall dominance of the iPhone. Microsoft’s Surface is due for release soon and along with Amazon and Google’s smaller devices, the iPad’s market lead will also start to come under serious threat.

It is also important to remember that Apple is fundamentally not an inventor of completely novel technology as such. Its entire history has been to take an existing concept and redefine it in such a way to remove its limitations, smooth its edges and make it something both useful and attractive. The problem with this is that there really isn’t anything out in the market that Apple can do this to. In brief, someone else has to invent something for Apple to improve it.

This presents Apple with a real problem. The iPhone and iPad are reaching (or have reached) the limits of their capabilities. There is really only so much you can do to this platform and their rivals are pretty much doing that and more. Some analysts are hoping that Apple can redefine the TV for example. However, it is really hard to see how they would do that.

For a start, there are plenty of smart TVs in the market. Companies like Google have singularly failed to get traction in this space and this is down to indifference to the concept, not necessarily execution. The other thing is that anything Apple did in this space would be expensive and Apple will not be able to capture mass appeal with something that is too expensive for the majority to afford.

The irony of Apple’s battle with the other phone vendors is that it is almost forcing those companies to improve their capabilities in terms of design and to increase their own pace of innovation. This is what makes Apple’s strategy of squabbling in court particularly short-sighted. Even if they win, companies like Samsung and Google will find ways around the patents and be encouraged to find ways to innovate and lead the market through their own design and ultimately through their own patents.

What does it mean for the consumer? Well, if we expect that Apple will continue its dominance, we are likely to be disappointed and as investors, we will most likely be poorer.

David Glance is a director at the Centre for Software Practice at The University of Western Australia.

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